Spectre of stagflation haunts SA

The risk of stagflation has pitted the Reserve Bank and the government against each other over who is to blame and what solutions might be able to pull South Africa back from the brink.

From as early as April, when the International Monetary Fund slashed South Africa's economic growth forecast for 2014 to 3.3% from 4.1%, Reserve Bank governor Gill Marcus warned that the country faced the risk of stagflation – when an economy experiences slow growth, rising prices and increasing unemployment.

She has since become progessively vocal about her concerns as the government's perceived lack of action continues and inertia begins to set in in the economy.

Marcus's criticisms include the need for labour-market reform, a suggestion that has not gone down well with the ANC's alliance partner, trade union federation Cosatu. Nor is the suggestion politically expedient with elections scheduled for mid-2014.

Things have only continued to get worse as the global economy shows little signs of recovery: the eurozone is projected to retract by 0.6% in 2013, the United States is growing at 1.8% and even China's economy is slowing. South Africa's gross domestic product (GDP) forecast has been revised down to 2% for the year, unemployment reached 25.6% in the second quarter of 2013 and inflation is in the upper end of its target band of 3% to 6%, which it is expected to breach soon.

Experts say the risk of stagflation is a real concern. "We are not there yet but we are knocking on the door," said Chris Gilmour, investment analyst at Absa Investments.

David Shapiro of Sasfin said: "The big question is where to from here?" Our three economic drivers – mining, manufacturing and credit – are under pressure … Stagflation is a worry."

At the first sign of trouble from the global financial crisis, the ­government poured money into propping up the public sector and the Reserve Bank cut interest rates to a 40-year low of 5% in July last year. But the new mutation of the downturn has hit emerging markets such as South Africa hard, and has seen the government assemble a task team and engage in talks with the private sector in response.

But this has not reassured the Reserve Bank, which has become more strident of late and is calling for courageous structural reform. Notably, the bank's frustration with government policy was expressed in two recent speeches, one delivered by Marcus at a labour law conference on July 31 and the other by the deputy governor of the bank, Francois Groepe, at a Unisa economics seminar on August 5.

Institutional authority In her speech, Marcus said that monetary policy could only provide short- to medium-term relief and was not a substitute for necessary structural reforms. She suggested that "sensible countercyclical policies combined with longer-term structural reforms" would help to pull the economy out of crisis. Central banks, she said, did not usually have the institutional authority or tools to undertake the structural reforms required to ensure that an economy grows faster or that unemployment is reduced at a faster pace.

Groepe made no bones about what he thought about the government's headway: "In general, South Africa has not made sufficient progress in tackling our many constraints … [our] track record in implementing the microeconomic reforms required to achieve structural change has been patchy."

Alternative ideas from both the governor and her deputy include:

lLabour market reforms that enable a more efficient movement of workers from one sector to another;

lImporting skilled workers: "It is estimated that for each high-skilled immigrant that comes into the country, between four and eight low-skilled jobs are created," Marcus said;

lTo introduce greater links for pay and performance, which would not require a change in the law;

lAddressing South Africa's poor export performance and diversifying the economy to create more jobs;

lThe government should expand and strengthen the quality of its public services, including the social wage, to enable low-skilled workers to live meaningful lives;

lSome variant of incentives such as tax breaks for firms to hire inexperienced workers and young people while protecting the existing workforce and older workers; and

lThat collective bargaining, which favoured big firms at the expense of smaller ones, be looked at.

"She [Marcus] has been saying basically the same thing now, really since November last year, at the monetary policy committee … and far longer behind the scenes," said Peter Attard Montalto, emerging markets economist at Nomura International.

"The frustration, reflected less publicly by Pravin [Gordhan, finance minister] and [Trevor] Manuel [national planning minister], is about the total lack of movement on South Africa's problems … There is a high level of annoyance and dissatisfaction, and that is why she is making such strong interventions," Attard Montalto said.

But a senior government adviser, who spoke to the Mail & Guardian on condition of anonymity, said the risk of stagflation, aggravated by external factors, had indeed caused concern at the Reserve Bank but Marcus's suggested reforms were not quick-fix solutions but rather long-term measures that would stand the country in better stead should it face a similar situation in future.

In terms of an immediate response to a global slowdown, the government had taken steps, such as increasing public investment, through its national infrastructure plan – by investing R750-billion in projects which are currently active – and by focusing on local procurement, the adviser said.

"She [Marcus] and the treasury both know they have to have a countercyclical strategy … they are hitting their limits and want the government to do more on the micro[economic] side, but you can't do stuff overnight.

Macroeconomic guidelines "The easy thing to do would be a fiscal stimulus; our interest rates are not particularly low compared to the rest of the world. Many people would argue that they [the Reserve Bank] should be more countercyclical."

South Africa's interest rate was cut to 5% in July last year but rates are as low as 2.5% in New Zealand and Thailand, 0.5% in the United Kingdom, 0.25% in the United States and 0.1% in Japan.

"They would rather risk a downturn than take a risk on macroeconomic guidelines," the government adviser said. "I don't think they will risk stagflation but they are not stimulating the economy."

But it is not just the Reserve Bank that is concerned. At the end of July, the secretary general of the ANC, Gwede Mantashe, announced that a presidential economic task team will soon be appointed to focus on accelerating growth in the country and will consult others about how bottle­necks to growth can be addressed.

But the Democratic Alliance's spokesperson on finance, Tim Harris, said in a press release that there was a risk it would be yet another committee that didn't lead to any real action and could simply be "the latest in a long line of bureaucratic measures from the presidency that simply paper over the deep cracks in our economy without leading to any action by the government".

Harris said the committee could also be a threat to existing economic policymaking bodies such as the National Planning Commission and the treasury.

On August 6, the representatives of major business lobby groups met President Jacob Zuma and other government officials to press for intrepid steps to be taken by the government to improve conditions for business, including changes to labour laws (See "Business lobbies Zuma on range of key concerns").

Economy of a society "The meeting comes amid a widening consensus that the government's policies are unsuited to the tasks of raising South Africa's growth rate and creating the jobs needed to make meaningful inroads into poverty and unemployment," Business Day reported.

"Labour laws are the number one complaint I get from FDI [foreign direct investment] companies operating in South Africa," said Attard Montalto, who is based in the UK.

Groepe, in his speech, said that obvious structural forms could not be easily implemented because of the complex dynamic and competing interests in the country. "Many structural reforms are difficult to implement precisely because of the political economy of a society," he said.

Montalto said that "the trouble is the government fundamentally doesn't accept there is a problem with the labour laws".

He said many people in government believed that the labour laws were truly the best way to reduce unemployment. But the government was also "hemmed into" a tripartite alliance with Cosatu and the South African Communist Party, both of which have been fairly critical of the Reserve Bank and which remain critical allies in general elections.

Patrick Craven, Cosatu national spokesperson, said the federation strongly disagreed with many of Marcus's views.

"We strongly disagree with most of what she has been saying, and we have been very critical of the Reserve Bank and treasury, [whose propositions are often] seriously at odds with the government and ANC's overall interventionist and developmental policy."

He said Cosatu believed Marcus and the treasury were pushing a more neoliberal market policy that was "seriously at odds" with the government's and the ANC's more interventionist and developmental policy and attempted to put the brakes on "many of these excellent policies government is committed to".

He said the federation was concerned that some of Marcus's ideas – such as lowering wages and market-orientated policies – had crept into the National Development Plan.

Craven said South Africa's labour laws were broadly acceptable and in line with international practice.

He said Cosatu's problem with the labour laws was that they were simply not enforced sufficiently and that there were many cases of them being blatantly flouted.

Business lobbies Zuma on range of key concerns

Representatives from business lobby groups met President Jacob Zuma on August 6 to discuss key concerns facing the private sector and to press for real change.

The meeting covered four areas of interest: education and skills development, the regulatory environment, increasing investment and the labour-relations environment.

The spokesperson for the Black Business Council, Sandile Zungu, said the meeting went very well. In the space of four and a half hours, business made presentations to the president, as well as the ministers of finance, economic ­development, trade and industry, higher education and labour, among others.

Zungu said business felt it should have a role to play in the presidential infrastructure co-ordinating commission, whose mandate is to co-ordinate long-term infrastructure planning.

“We need to do all we can to fast-track the infrastructure roll-out,” said Zungu. He said business had expressed interest in getting involved both in actual infrastructure and in a funding capacity.

Asked whether recent revelations about major collusion in the construction industry had been mentioned by the government in the meeting, Zungu said: “The issue was raised by business and government, which expressed concern about corruption, but didn’t use words like cartel or collusion.”

On the question of labour, Zungu said the group had a “very frank discussion” about the issues at hand and the effects the labour regime had on business.

Zungu said it was agreed that another meeting would be held again in the next three months, whereafter smaller technical teams would be set up to make sure matters were scrutinised.

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